Despite being home to a large Muslim population, Islamic banking has made little headway in Africa. However, the continent’s need for development finance could lead to more sovereign sukuks being issued, Moody’s Investor Service said in a new report.
Africa has close to a quarter of the world’s Muslims, but its Shariah law compliant banking assets make up only around 2 percent of global Islamic banking assets, the report said. While the Egyptian, Moroccan and Nigerian banking sectors are among the largest on the continent, the ratio of Islamic banking assets to total banking assets is low.
The reasons for the low visibility of Islamic banking include low levels of wealth in the continent resulting in limited domestic savings and low public awareness. Additionally, until recently there was limited government attention paid to the sector, according to Moody’s.
That said, the ratings agency expects the continent’s vast financing needs to spur long-term demand for Islamic banking products.
“Islamic banking has huge potential to expand in Africa, whose Muslim population was estimated at around 446 million in 2020. Egypt, Morocco, Sudan, Nigeria and Senegal will lead the growth, helped by their existing or rapidly evolving regulatory and supervisory structures that will promote Islamic banking,” said Peter Mushangwe, CFA – AVP-Analyst Moody’s.
The shift to shariah finance is expected to be led by sukuk issuances, mainly by sovereigns, for financing infrastructure development. “We expect West African sovereigns to continue to lead in issuances,” the report said.
While African countries like Nigeria are setting up or enhancing their regulatory and supervisory structures that will promote Islamic banking growth, the legislative complexity and lengthy processes associated with sukuk issuance are major constraints, the ratings agency said.
“Identification of physical collateral and complex documentation required for Islamic financial products, as well as limited product offerings in jurisdictions with nascent Islamic banking are further obstacles.”
African countries with large Muslim populations–Egypt, Morocco, Sudan, Nigeria and Senegal–are expected to lead growth of Islamic finance. The governments of Morocco, Sudan, Nigeria and Senegal have a history of sukuk issuance.